Stock, Bond Certificates Held by DTCC Damaged by Sandy Flood

Nov. 15 (Bloomberg) -- Stock and bond certificates held in
an underground Manhattan vault owned by the Depository Trust &
Clearing Corp. were damaged by flooding in Hurricane Sandy,
according to the DTCC.

The New York-based company that processes transactions in
U.S. equities and government, municipal and corporate bonds said
it’s too early to determine how many of the 1.3 million physical
certificates can be restored, according to a statement. The 40-year-old vault was submerged when the Atlantic Ocean’s largest
tropical storm on record slammed New York City. DTCC has hired
“disaster recovery and expert restoration firms” to work on
the project, the firm said yesterday.

“Our analysis of the condition of the vault, once we were
able to open it, was that significant flooding and water damage
occurred throughout the facility,” DTCC said of the 10,000-square-foot storage chamber at 55 Water Street in lower
Manhattan. “While it is premature to determine the full extent
of the damage, it is essential to begin the restoration process
to avoid further deterioration.”

Computerized ownership records for the company’s holdings
of certificates are “robust,” DTCC said. The company called
the effort of sorting through the damage “more of an
administrative and logistical challenge than an economic issue”
and said it’s talking to transfer agents about determining the
process for issuing replacement certificates without requiring
the originals, according to the statement.

Processing, Registering

The DTCC processes the underwriting of stock and bond
offerings, electronically registers securities and ensures that
dividend payments are accurate, according to the company. It
also manages transactions and payments in equities and fixed
income and guarantees that trades clear. Purchases and sales are
mainly handled through electronic book entry, with the
securities registered in the name of DTCC unit Cede & Co.

The company’s subsidiaries processed about $19 trillion in
securities trades the week of Oct. 29, compared with an average
of $23.1 trillion this year. It handled transactions from the
previous week by moving people to its Brooklyn data center,
Michael Bodson, president and chief executive officer, said in a
phone interview on Nov. 7. About 600 of the 2,000 employees at
the company’s headquarters, which were shut, were working in the
Brooklyn facility last week, he said.

The DTCC is owned by banks, brokers, mutual funds and other
financial institutions.

Little Impact

The destruction or damage of certificates won’t hurt
investors and is mainly a “nuisance” for the DTCC, James
Steven Rogers, a professor at Boston College Law School, said in
a telephone interview. He was the principal drafter of the 1994
revision to the commercial law of investment securities that
deals with issues such as what happens when a person has lost a
certificate.

“In equity securities the presence or absence of the piece
of paper is essentially irrelevant,” Rogers said. “If someone
can by other means prove the ownership, they can work it out. It
might just be a nuisance to replace the certificates. It has no
systemic impact on markets.”

Problems could occur in instances such as a municipal bond
issued in the form of bearer certificates in 1920 that matures
99 years later, Rogers said. Bearer securities don’t have a
record of ownership other than the certificate. Still, the law
offers a way for people to establish ownership of lost or
destroyed certificates, making the original pieces of paper less
important, he said.

Proving Ownership

“People theoretically might have problems demonstrating
their positions,” he said. “On the other hand, DTCC has scads
of other records of the fact that it had these certificates.”

Certificates in the vault have been recorded electronically
with the data accessible from multiple locations, Bodson said.
DTCC also has images of all bearer stocks and bonds in the
vault, he said last week.

The weekend before Sandy hit the East coast, DTCC switched
day-to-day command of its operations to its office in Tampa,
Florida, and moved control of the technology that runs its
clearing and settlement business and record-keeping to its
Dallas data center, Bodson said. The organization has had a
disaster recovery center outside New York since 1980, according
to a report published that year.

“Over the weekend we saw flooding would hit lower
Manhattan and declared we were going into recovery mode,”
Bodson said. “Given our criticality to the U.S. financial
system, we have very, very robust disaster-recovery plans that
have been built up over the years. We kept operations going. We
did not have any significant issues other than the vault.”

Below Ground

The company occupies eight of the 54 floors at 55 Water
Street, according to Bodson. The vault, three levels below
ground and built on bedrock, contains 1.3 million stock and bond
certificates and other securities stacked on shelves like in a
library, he said. DTCC’s vaults had a record 32 million
certificates in 1990, the company said in a 2011 report.

The DTCC said in 2009 it would relocate about 1,600
employees to offices in Jersey City, New Jersey, in the
beginning of next year. The contents of the vault were going to
be moved to a vault in the new location, Bodson said.

In 1987 the DTCC doubled the size of its largest storage
facility, in Garden City, Long Island, and said it would close
two smaller chambers, according to its annual report that year.
The vault at 55 Water Street is now the company’s main facility.

A more accurate assessment of the condition of the damaged
securities may be available within a week, while the restoration
process may take months, DTCC said yesterday. The company’s
subsidiaries processed trades valued at about $1.7 quadrillion
last year and provides custody and asset servicing for
securities issues valued at $39.5 trillion, the DTCC said.

Eliminating Securities

The DTCC has been working on a plan to eliminate physical
securities in U.S. markets to make processing more efficient and
reduce risks. In a July report the company said there were 86
percent fewer certificates in its vault than there were in 2000.
The inability to cope with the growing number of certificates in
1968 and 1969 led to the New York Stock Exchange closing every
Wednesday and subsequently operating with shortened hours to
allow member firms to process the backlog.

What came to be known as Wall Street’s paperwork crisis
drove a legislative overhaul of the securities industry and the
creation of a national market system through the Securities Acts
Amendments in 1975. The Depository Trust Co. was formed in 1973
to deal with the problems of the certificates. The creation of
the U.S. national clearance and settlement system followed to
allow brokers and banks to keep securities in a centralized
depository and settle trades by computerized book entry.

Security certificates are no longer vital even though paper
certificates haven’t been eliminated, Rogers of Boston College
Law School said.

“We might look at this event in five years as a
blessing,” he said. “All these old pieces of paper were
destroyed and people realized it didn’t make any difference.”